The Dow Jones industrial average sank 265 points on Tuesday and all three major stock indexes fell more than 2 percent as investors reacted to more signs of weakness in the U.S. economy and poor earnings from several big companies.
The broader stock market is on pace for its longest losing streak in two years. The Dow Jones industrial average fell below 12,000 and the Standard & Poor's 500 index lost nearly all of its gains for the year by the early afternoon.
"The market is starting to wonder where the growth is going to come from," said Nick Kalivas, a vice president of financial research at MF Global. "It hasn't hit the panic button yet, but that's where we're drifting."
Behind the sharp decline in stocks: A series of weak economic reports. The Commerce Department reported that consumers cut their spending in June for the first time in nearly two years. Analysts had predicted a slight increase. Incomes also rose by the smallest amount since September, reflecting a weak job market.
The report came a day after a weak manufacturing report and last Friday's report that the economy grew at its slowest pace in the first half of the year since the recession ended in June 2009.
The Standard & Poor's 500 fell 32 points, or 2.6 percent, to 1,254 in afternoon trading. The Dow lost 265 points, or 2.2 percent, to 11,866. The NASDAQ composite fell 75, or 2.8 percent, to 2,669.
All 30 stocks in the Dow lost ground. General Electric Co., Pfizer Inc. and United Technologies Corp. led the index lower with losses of 3 percent or more.
The S&P index has fallen for seven straight days, its longest string of losses since the middle of the financial crisis in October 2008. It is down about 7 percent since reaching a high for the year of 1,363 on April 29. The Dow has fallen for eight straight days, losing a total of 730 points, or nearly 6 percent.
Even with the losses, the S&P and Dow are now near where they were at the end of June.
But some investors say that their outlooks for the rest of the year are diminishing because they see few sources of support. Last year, the Federal Reserve began a stimulus program, known as quantitative easing, that was credited with helping the U.S. economy avoid another recession.
But the Fed has indicated it does not have plans to implement another round of stimulus. And the new concern in Washington about deficits makes it even less likely, analysts said.
"With this debt debate going on, there is not an expectation for more fiscal or monetary stimulus and that's a real concern," said Jim Peters, the head of Tactical Allocation Group, a money manager in Michigan with $1.5 billion under management.
Archer Daniels Midland Co. dropped nearly 4 percent after the agricultural conglomerate said it missed Wall Street's profit forecasts. High-end retailer Coach Inc. lost nearly 6 percent after the company said margins declined, cutting into profits. A pullback in spending could threaten profits at the company, which is starting to make less from each purchase because of higher costs.
The signs of economic weakness pushed government debt prices higher. The yield on the 10-year Treasury again fell to a new low for the year of 2.63 percent from 2.75 percent Monday. Yields fall when bond prices rise. Gold, another asset investors buy when they're worried about the direction of the economy, gained 1.4 percent to $1,645 an ounce.
The consumer spending pullback was the latest indication that the U.S. economy may be slowing. On Monday an early stock rally over relief that the House had passed a debt limit compromise was halted by a report that U.S. manufacturing barely grew last month, a much weaker showing than analysts had expected.
Many economists, including Federal Reserve Chairman Ben Bernanke, have said the U.S. economy would gain momentum in the second half of the year as gas prices fall and Japan's factories recover from the earthquake disaster in March. Slow U.S. manufacturing growth, a weak job market and concerns about spending cuts in the debt deal have cast doubt on those predictions.
The growth of China's and India economies have also slowed recently after their respective central banks raised interest rates. American corporations have counted on increasing profits in China as a way to make up for slower revenue growth in the U.S. Companies in the S&P 500 index are expected to make nearly half of their profits overseas in 2011.
President Barack Obama signed a compromise bill Tuesday to raise the country's borrowing limit, hours ahead of a midnight deadline after which the U.S. government wouldn't have enough money to pay all its bills. The passage of the bill averted the possibility of a default on U.S. debt.